Economic and Policy Updates

Question:  How do you think the recent election results, higher gas prices, and Federal Reserve Chairman Powell’s remarks about tapering bond purchases will influence the economy and financial markets?

Answer: You’ve touched on three significant occurrences that are in the spotlight this month. The Fed, Elections, and OPEC (Organization of the Petroleum Exporting Countries) are all important items when evaluating future implications and will touch on each one today.

It’s no surprise that the Fed will begin to slow the “easy money” environment as the economy heals from the pandemic. The challenge for the Federal Reserve is how to balance economic recovery, inflation and labor expectations while producing a soft landing to include sustainable growth and moderate inflation. 

Fiscal policy remains supportive of economic growth. Fed Chairman Powell’s statement that bond purchases will be reduced by $15 billion per month is the first step in reducing the “easy money” position gently with hopes of avoiding a “taper tantrum” market response like we experienced in 2013.

On May 22, 2013, Federal Reserve Chairman Ben Bernanke announced that it was time to remove the proverbial punch bowl away from the party and begin tapering asset purchases, sending a negative shock wave through bond markets with selling. Today’s Fed would like to adjust monetary policy for a more even keeled recovery. In the past, it’s been difficult to slow growth and keep inflation under control. The next several months could be quite challenging. It’s widely anticipated that the Fed will remain patient and interest rate hikes will be on the agenda during the end of 2022 and into 2023.

It’s no secret that we’re battling against supply chain disruptions. Supply chain issues are adding to price increases. In the last twelve months there have been 1,300 references to “supply chains” on S&P 500 companies’ earnings calls. Companies are finding creative solutions by shifting suppliers, relying on air freight, offering new employment incentives, and investing in automation. By focusing on solutions rather than the disruptions (increased input prices, shortages, and delays at the ports) we’re moving towards more normalcy.

Production bottlenecks and material shortages take place during every economic recovery, but recent pressures have been especially pronounced and could continue for a while longer. A danger with inflation is that it can become a self-fulfilling prophecy if inflation expectations continue. The post-pandemic economy is unique due to the response to increasing demand, labor shortages and innovation to how we will work and spend in the future. Technology gains, like the use of robotics and artificial intelligence could help offset slower growth rates, but that will take time. As cases of the Delta variant decline, we see consumers feeling confident and are now spending in restaurants, hotels, and airports.

Yes, there are photos of bare shelves, docked ships and the reality of higher gas prices. But take a step back and look beyond the headlines. Regarding gas prices, the expectation is that political leaders will put pressure on OPEC to monitor pricing. The energy sector rebounded sharply as demand increased with oil prices up over 70% year-to-date. As we move into colder months and with the national average gasoline price moving from $2.12 to $3.40 in just 12 months, there will be a negative impact on consumers. Adjustments need to be made to better align the current supply with current demand. This translates into the possibility of lower oil prices in the months ahead aiding consumers directly and indirectly though gasoline expenses and product prices.

Lastly, it’s possible that recent election results could encourage Congress to consider a few compromises on tax provisions (corporate, individual, capital gains, dividends, and estate taxes) which could be a positive for the equity market by aligning policy with priorities of middle-ground voters.

Between the Fed’s decisions, OPEC meeting, election outcomes, and economic data releases, there’s a lot of information to evaluate. These newsworthy developments will continue to have implications on consumers and investors moving forward. Stay focused and invest accordingly. 

The opinions expressed are those of the writer as of November 7, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision and is not a recommendation or solicitation to buy or sell any particular investment. Investing involves risk and the possible loss of principal invested. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Past performance may not be indicative of future results.

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